Stress testing exercises

Stress testing is an important risk management assessment tool that can be used to alert banks about adverse outcomes related to various risks. It also provides an indication of how much capital might be needed to absorb losses should these adverse outcomes occur. The hypothetical scenarios used should be severe but plausible and should include future changes in those economic conditions that may have an impact on the financial health of banks. However, stress testing scenarios should not be confused with a bank's forecast. Stress testing helps banks to assess their risks, facilitates capital, liquidity and contingency planning, and contributes to the determination of a bank's risk capacity. Stress tests are performed for different types of risk including credit, market, liquidity and operational risk.